A couple comments – most of these are focusing on California. There’s a good reason for that: Calpers is the largest pension fund in the country. If you can get it to follow your stupid investment idea, perhaps smaller funds will follow.

Second, the issue with Norway. I am a little suspicious about the supposed Social Justice Warrior motivation for divesting from the pipeline.

A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary. If an individual breaches the fiduciary duties, he or she would need to account for the ill-gotten profit. His or her beneficiaries are entitled to damages, even if they suffered no harm.

Fiduciary duties exist to encourage specialization and induce people to enter into a fiduciary relationship. By imposing these duties, the law reduces the risk of abuse of a beneficiary by the fiduciary. As a result, potential beneficiaries can have greater confidence in seeking out a fiduciary.

So, the usual argument is about fiduciaries grabbing money for their own use. That was the old-time problem with those handling funds for other people.

But we’ve come across other, not-directly-for-profit, actions that destroy the value of assets that the fiduciary is supposed to protect, in this case for political reasons.

Fiduciaries are in a position of trust with respect to the participants and beneficiaries in the plan. A fiduciary’s responsibilities include:

- acting solely in the interest of the participants and their beneficiaries;
- acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
- carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
- following the plan documents; and
- diversifying plan investments.

The responsibility to be prudent covers a wide range of functions needed to operate a plan. Since you must carry out these functions in the same manner as a prudent person, it may be in your best interest to consult experts in such fields as investments and accounting.

Note that the top two are key. Not “making a political statement”, not “starting a first-of-its-kind GREEN investment fund”.

The people with true fiduciary duty – that is, Calpers trustees in general, are not going along with this. But not every place has the concept of fiduciary duty, it seems. And POLITICIANSARENOTTHEFIDUCIARIES.

That the California legislature votes for this, that, and the other stupid investment policy … they’re not the ones who directly suffer. The theory has been that taxpayers will soak up whatever idiotic investment policy is imposed on Calpers, and that theory is being tried directly.

Even if they’re not able to directly hit taxpayers to make up for investment shortfalls, there will be hits on taxpayers in terms of reduced services, higher borrowing costs, etc. And then the taxpayers will become ex-taxpayers as they move to more tax-friendly climes.

I understand politicians are usually not very smart people, otherwise they’d be the people buying the politicians, but perhaps they would want to think about this. Especially if they want to make a career of being a politician. Talk about unsustainable if the fun money goes away.

TO THELOGICALCONCLUSIONS

The truth is that for many of these funds, divesting from any particular industrial sector will not have a huge effect.

Let’s say you divest from oil and other fossil fuels.

Okay, but there are other companies that do well because the energy sector is doing well. Obviously, the companies providing equipment and other support for the oil, etc., companies. And then there’s all the people who work for these companies — they buy stuff. So third-hand you get boosts to retail operations like Walmart and car companies, etc.

Essentially, in a global economy, something so central as energy is going to be connected to how well others are doing. (If you want to go to finance theory, this relates to beta, aka market correlation.)

So the only way to not be invested in eeeeeevil oil is to not be invested in anything.

Portland is getting out of corporate investing altogether. The Portland City Council voted unanimously on Wednesday to end the practice following pressure from activists to withdraw from companies that are problematic for the environment, human rights or government.

The city has $539 million invested in corporations this year, City Treasurer Jennifer Cooperman said.

Activists for months have urged the Portland City Council to divest from controversial companies. They pleaded with them in December to withdraw from Wells Fargo due to its investments in the Dakota Access Pipeline and from Caterpillar, a company that makes trucks and bulldozers, some of which they say are used to harm Palestinians in the Israel Palestine conflict.

nstead, commissioners decided not to invest it in any corporations period, in part to avoid the trouble of having to perpetually decide which corporations the city considers bad actors.

As it divests, the city will put its money in federal bonds and other non-corporate options, Cooperman said. She said the switch will cost the city at least $4.5 million a year.

“This is a win,” said Hyung Nam, a member of the city’s Socially Responsible Investment Committee tasked with looking into companies’ environmental, social and government impact scores. “The city is actually willing to lose money to their budget because they want to get out of these big corporate nightmares.”

…..
Wheeler said he also generally opposes divestment because he sees it as a lost opportunity to influence corporations from the inside. He shared examples of times that he said he successfully changed corporate policy as state treasurer, including a time Oregon’s pension fund joined with other Chipotle Mexican Grill shareholders to oppose the bonuses and salaries of top executives. Wheeler said he also influenced the Security and Exchange Commission’s decision to require corporations to publicly disclose the ratio of their chief executive officers’ salary to that of the average employee.

Now, I was confused. They aren’t going to invest in anything for their pensions?

The pay-as-you-go structure of FPDR benefits means that
the valuation is not used for:
 Establishing the funded status of the FPDR program
 Determining an actuarially calculated pre-funding contribution rate

Digging through the Portland pension files, I see that they have a $3.7 billion liability (6/30/2016, using a 2.85% discount rate)… over $100 million in benefit flows per year, and these benefit flows are projected to increase for a couple decades.

But most of these funds are hurting from undercontributions, not sub-market returns. They’re trying to reach for above-market returns and getting…. well, I’ll get to that in a future post.

So politicians and other groups playing for political purity are essentially a distraction from the need to hike up contributions. I don’t think many people will be very distracted as the tax bills hit their pockets.